The Green Sheet Online Edition

June 22, 2009 â€¢ Issue 09:06:02

Insider's report on payments
Interchange debate rages on

By Patti Murphy
The Takoma Group

Retailers are turning up the heat on interchange fees. After failing to secure an interchange amendment to the Credit CARD Act of 2009, merchants are pressing for standalone legislation that would rewrite federal anti-trust law so merchants can negotiate interchange fees en masse - similar to the way unions negotiate wages for the rank and file.

Perhaps if I could be convinced the folks lobbying on behalf of interchange reform have the best interests of American shoppers in mind, I might be swayed. But I'm not convinced. Indeed, while retailing lobbyists press for more negotiating power over interchange, they're also fighting congressional initiatives that would make it easier for workers to unionize and negotiate with retailers and other employers over wages.

The argument came from Tom Brown, a Partner in the international law firm O'Melveney & Myers, who worked with Visa Inc. in a debate with Mallory Duncan, Senior Vice President and General Counsel at the National Retail Federation. It seemed to me to be a typical knee-jerk reaction to Duncan's calls for interchange regulation.

Since then, I've reviewed the unionization bill Brown was referencing - the Employee Free Choice Act (S 560 and HR 1409), which is opposed by the NRF and other employer groups. Backed by congressional luminaries like Sen. Edward Kennedy, D-Mass., the Employee Free Choice Act would, among other things, take away the authority employers now have to stymie employee unionization efforts.

What's in the legislation?

Legislation addressing interchange has now been introduced in both the U.S. House of Representatives and Senate.

HR 2695, the House legislation crafted by Rep. John Conyers, D-Mich., Chairman of the House Judiciary Committee, would create exemptions to federal anti-trust laws so that merchants might send representatives to sit down at the negotiating table with banks and network operators to hammer out agreeable interchange rates.

In the Senate, Richard Durbin, D-Ill., introduced SB 1212, which would entrust final interchange pricing decisions to a panel of three judges, appointed by the U.S. Department of Justice. Durbin, who also carries the title Senate Majority Whip, plays a key role in determining legislative priorities in that chamber.

Both bills are known collectively as the Credit Card Fair Fee Act of 2009 and describe coverage as applying to "access" to "electronic payment systems," which seems to suggest any final law might not be limited to the Visa and MasterCard Worldwide networks.

As drafted, the legislation defines covered networks as those used for credit, signature debit and PIN debit cards. Under HR 2695, a covered network would have to carry at least 20 percent of the combined yearly value of U.S. credit and debit card payments (based on the previous year's tally). SB 1212 lowers that bar to 10 percent.

Only bank-controlled acquirers are covered by the legislation; federally regulated credit unions are specifically exempt. Independent processors and other third-party partners (such as ISOs) are also expressly exempt from direct coverage by the bill.

During the Chicago Fed conference, I asked Duncan, who is also a Spokesman for the Merchants Payments Coalition, how he envisioned the interchange negotiation process. Neither the Conyers nor Durbin bills had been announced yet, but Duncan felt confident legislation was coming.

Here's what I heard: An industry group, such as the NRF or the MPC, would sit down with Visa and MasterCard and negotiate interchange for the entire retailing sector. It then would be up to acquirers to negotiate individually with retailers regarding other acceptance fees.

The labor connection

I was blown away. One, even two organizations negotiating on behalf of millions of individual merchants? Are they serious?

My mind flashed back to that late 1970s. My husband was in telecommunications, and as a member of a very large union, he was routinely disappointed whenever new contracts were negotiated. He felt those sitting at the negotiation table always came away with the best pay packages.

Eventually, he took a job in a nonunion shop and I, the child of a one-time union man, was compelled to accept the notion that perhaps unions had outlived their effectiveness (at least in grey collar jobs like network operations). Now, 30 years later, economic realities seem to suggest otherwise, and unions are gaining traction in industries like retailing. It's not surprising retailers would prefer not to have to negotiate employee wages and benefits with unions. But, again, they shouldn't have it both ways.

I'm not sure the current Congress will allow that to happen. There are far too many more important initiatives that demand attention, like keeping the banking system afloat. (Of course, there are those in Washington who want banks to make concessions in return for federal bailout money, and messing with interchange may emerge as an option.)

The major problem I see is that lawmakers are never eager to vote on issues that pit one constituency (like local retailers) against another (local banks and their acquiring partners). The interchange debate also lacks any significant consumer presence, even though retailers argue that lower interchange will be reflected in lower product prices.

"It's just not a front burner issue for us," said Jean Ann Fox, Director of Financial Services with the Consumer Federation of America, during a panel discussion at last month's Chicago Fed conference. The CFA is more concerned about bank overdraft fees, she added.

Adam J. Levitin, Associate Professor of Law at Georgetown University Law Center in Washington, points to three ways the battle over interchange can play out, and it doesn't have to be heavy-handed regulation.

The options are:

Remove barriers to market pricing, such as honor-all-cards and no-surcharge or discount rules, as well as bundled rewards programs.

Set the Federal Reserve up to compete with card networks in much the way it competes today in the check and automated clearing house arenas.

Regulate card payment networks as though these were public utilities.

"We have to look at net social welfare," Levitin said during a presentation at the Chicago Fed conference. "Take away the subsidies and other externalities, and this won't be a political problem." It's a compelling argument. If I were in charge, I'd take the first option.

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com.

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